Understanding the Division of Assets in a Divorce

Aside from children, there is likely no other divisive, contentious element of a California divorce than the division of assets. California follows the principle of community property, which is codified in the California Family Code at Section 2550 and means that marital assets and debts should be divided equally between spouses. The principle itself seems basic enough that the division of property and debts should be easy enough: you just split it equally down the center. 

But the division of assets is not so simple. Here’s a guide to alert you to the process and all the many factors that can complicate that process. Knowledge is your advantage in a divorce and the division of your marital property.

The Process of Dividing Assets

Community property, also referred to as marital property, is property acquired during the marriage. Property in this sense not only includes actual property but debt as well. The asset division process is straightforward and can be divided into three parts:

1. Identify the community property, both assets and debt;
2. Assign values to the community property; and
3. Divide the communal property.

1. Identifying Community Property

Community property can be summarized into three parts:

1. Anything you earned while married up to the point of separation;
2. Anything you bought with money you earned while married up to the point of separation; and 
3. Debt you accrued or took on while married up to the point of separation.

During the division of process you must identify all of this property, so it is good to sit down with a spreadsheet and start listing all personal and real property you own as well as all debts you owe, starting from the date you were married.

Community property examples include:

• Furniture
• Jewelry
• Art or other collectibles
• Real estate, like a residential home, vacation home, farms, and more
• Vehicles, like passenger cars to motor homes to lawnmowers
• Financial assets, like income, savings, investments, and retirement accounts
• Business interests
• Debts, like mortgage, personal loans, student loans, or credit cards

Community property is distinguished from separate property, the latter of which California Family Code § 770 defines in three parts as:

1. All property owned by the person before marriage
2. All property acquired by the person after marriage by gift, bequest, devise, or descent, and
3. The rents, issues, and profits of any item of separate property, which basically means any money the asset (separate property) makes.

Identifying community property can become complicated when separate property is commingled with community property. For example, if one spouse uses funds from a bank account owned prior to the marriage to help pay for the communal home and other expenses while married. Commingling can make it challenging to determine the separate or community nature of an asset. In such cases, the court may apply tracing methods to establish the origin and ownership of the asset.

Some separate property can also become part of communal property through transmutation, which means the separated property was transferred to community property. To be valid, however, transmutation requires written agreement by the spouse whose property is adversely affected.

2. Valuing Community Property

Once you know what property you are working with, you must then determine the value of it. Valuation is important because it will directly affect how assets are divided. For example, if a residential home is valued at $400,000, and the vacation home is valued at $300,000, then to be split equally, whoever gets the vacation home should be allotted another $100,000 in property, which could be, for example, two vehicles. The equal part is not in the items divided, such that it’s one house for another house, but in the monetary value of the tangible and intangible assets to be divided. If all assets total a value of $1 million, then in theory each spouse should receive $500,000 in assets. 

To determine the value of things like real estate, businesses, investments, and other significant assets, professional appraisers or experts may be employed to ascertain their fair market value. 

Disputes over asset valuation are not uncommon. Indeed, valuing assets can be contentious, particularly when it comes to determining the fair market value of complex assets like businesses or real estate properties. Each spouse may have differing opinions on the value and the professionals they hire to appraise the assets may arrive at different determinations. Often, these disputes lead to trial where a judge or jury will have the final say on the value if the parties cannot agree.

3. Separating Community Property

Spouses have the option to reach an agreement on the division of assets outside of court through a marital settlement agreement. This legally binding document outlines how assets and debts will be divided. It provides flexibility for couples to customize their distribution plan based on their unique circumstances and preferences.

Coming to an amicable agreement on the division of community property, however, even after it has been identified and valued, is not always easy. In fact, many factors exist that can help make the process move along or stall it in its tracks. 

Emotional Attachments

Emotional attachment to certain assets can complicate the division process. Sentimental value, personal history, or the desire to retain specific assets may create emotional tensions and difficulties in reaching a fair and amicable agreement.

Debts and Liabilities

Dividing debts and liabilities acquired during the marriage can be as challenging as dividing assets. It involves determining which debts are community debts and which are separate debts. Disagreements may arise regarding the responsibility for each debt and how to distribute the financial obligations between the spouses.

Tax Implications

Tax consequences of asset division can significantly impact the overall financial outcome for each spouse. Different assets may have varying tax implications, such as capital gains taxes or tax basis considerations. Determining how taxes will be allocated and understanding the long-term financial consequences is essential.

Unequal Financial Contributions

In cases where one spouse has contributed significantly more to the acquisition of assets or has been the primary breadwinner, the division of assets can become a point of contention. The lower-earning spouse may argue for a more significant share of the assets to address financial disparities, while the higher-earning spouse may seek to protect their contributions.

Litigation and Court Intervention

When parties cannot agree on the division of assets, litigation may become necessary. This can prolong the divorce process, increase legal costs, and lead to an outcome that may not satisfy either party. Relying on a judge’s decision to divide assets may not always align with the preferences or expectations of the spouses, and so this factor should always play a significant factor to get parties back to the negotiation table when division of assets gets heated.

Alternative Dispute Resolution for Division of Assets

Mediation and collaborative divorce are alternative dispute resolution (ADR) methods that allow spouses to work together with the help of professionals to reach mutually agreeable asset division arrangements. These processes promote open communication, cooperation, and creative solutions, enabling couples to maintain control over the outcome and reduce conflict.

In the end, even when there are strong feelings, both parties tend to want to decide for themselves who gets what rather than let a judge or jury decide it for them. Having a strong divorce attorney representing your interests and rights can help move the proceedings toward that type of resolution.